To me it’s all funny money. It only has value since we’ve all convinced ourselves that it’s true.

Greed doesn’t destroy a business, recklessness does.

If you ask me, there were a lot of people over there smoking the crack pipe and dreaming if they closed their eyes and clicked their heels 3 times Santa would come down their chimneys and make them millionaires. Unfortunately, when they finally came down off the crack, they realized they were standing in the unemployment line. One year from now, they’ll be standing in the soup line.

WAMU had a proven profitable business model since 1889. They moved into their new headquarters in 2006. This is not a company that desired to go out of business. Greed, stupidity, and a sense of entitlement destroyed over a hundred years of others’ caution and hard work.

Then, after this glorious hundred year history, WaMu packs it in after one year of trouble. Give me a break.

I’m fascinated by how all of these great financial institutions, after years of profit, all stopped doing business because of losses. I’m even more interested in how home mortgages ever became the focal point of global lending. It makes no sense.

Commercial lending, trophy Real Estate holdings, and corporate lending to generate larger profits seems more what a global financial crisis is made of. Something like a WaMu seems like the canary that dies in the mine shaft.

They made mad money, but in comparison to government lending it was nothing.

Hitting the hard ‘nog already this morning?

Option, ARM, or neg am are for short term holds to flip. That’s it. There’s no more, Fees are based on risk. Lenders all know this. They hired Loan Originators as commissioned sales people to generate paper. The paper was sold, fees were generated, and interest on an over priced asset was collected. Everybody made money.

More money is being made today by the same lenders who brought us thirty per cent credit card debt, with fees, rolling those balances into mortgages on over priced assets then selling the loan to debt collectors.

Mortgages actually are a thing of the past. We now have notes secured by a deed of trust so the lender can foreclose quicker. Lenders are in the Real Estate business. They churn properties for profit and there is always profit in properties. Rental income is a return on ivestment.

WaMu made trillions of dollars then sold out at the first sign of trouble. The holdings alone must be extensive. If you avergae over the time the company has been in business it will take a long time for the over all portfolio to be at risk.

This was never a gamble. It isn’t even a calculated risk. It’s just business.

The problem is that you can do business after the fees, interest income, and rental income are generated with very few people in any location. As you wind the whole thing down to a bottom line profit, which can take years, you can do it from a desert location away from public scrutiny.

All of those granite waiting areas are no longer needed.

I suppose it is, if you can’t foresee the future and don’t create ways to mitigate risk.

As an example, I give you the owner of a junkyard dog. Every day, the owner riles him up and encourages aggressiveness. Then, he walks him down the street in front of an elementary school.

Now there are some numb-nuts out there who don’t believe that you could ever foresee that the dog might maul a child. Whocoodanode?

This has been the attitude of the Bush Administration, the banks, and the investment firms. If you lend to anyone who could fog a mirror and encourage reckless borrowing and spending from the general populace, then who would expect a consumer credit crisis? Whocoodanode?

In a similar manner, it is possible to draft a business model where the probability of success weighs in your favor. I would not term this as “gambling” in a strict sense of the word. OTOH, if I draft a business model where the probability of success in not in my favor and proceed anyways, I tend to consider that gambling.

I can confirm what jonness offered. Pay option ARMs with negative am were FIRST considered an extremely high risky loan and were only offered to prime borrowers with a high FICO and a hefty downpayment.

Then when the bubble really started kicking into gear, the credit score and downpayment requirements for these loans slowly started to relax until anyone could get one of these loans and mortgage brokers were being offered huge premiums to sell these loans to consumers. 4, 5, 6 percent of the loan amount in fees collected per loan, to push these products. So, for example, on a 300K loan, a 5% yield spread would have been $15,000 compensation PER LOAN.

I’m not sure I understand what you are asking

I am just trying to understand what portion of negative amortization loans are “prime”. If it turns out that any significant number of “prime” loans were actual interest only or negative amortization, then it would stand to reason high default rates might not remain just in Alt-A or sub-prime categories.

Apparantly not if you’re a bank CEO. In that case, you get paid no matter what.

For most others it comes down to risk:reward ratios. WAMU could have easily maintained profitabaility without going hog wild on the subprime loans. But for whatever reason it decided to up the numbers and gamble on lending half million dollar mortgages to strawberry pickers. My guess is this resulted from greed, stupidity, or both.

Merry Christmas!

I’m not sure I understand what you are asking. According to this analysis (see page 61)

http://www.designs.valueinvestorinsight.com/bonus/pdf/T2_Housing_Analysis.pdf?

“Option ARM’s were made to prime borrowers. Banks typically relied on appraised value of the home and borrower’s high FICO score. So 83% of Option ARMs written in 2004-2007 were low- or no-doc (liar’s loans)”

I assume (most of?) the remaining 17% of loans were with documented incomes and high FICO scores. it makes sense that some prime borrowers would choose negative armortization. For instance, a flipper might want to pay the minimum while he fixes the home and flips it. Also, I assume a portion of the 83% were documentable as prime for a lower amount than loaned.

Or are you asking if there was a special pick-a-pay loan with a lower interest rate meant only for high FICO and full documentation? At any rate, take my post with a grain of salt, as I’m not a mortgage broker.

Let’s put it another way: were any negative amortization loans ever offered to people who provided full documentation and an excellent credit score?

I can’t post to the forums (where there is a thread on neg-am loans) for some reason so I thought I would ask this here.

The burden of designing an intelligent business model is on the execs, not the customers. As fearful as the customers were who ran the bank, the execs were equally as greedy who designed a system to lend money to people who obviously could not afford to pay it back. In business, when you get stupid, you lose. That’s why it is extraordinarily important to make decisions based upon logic as opposed to emotions. Otherwise, you’re simply gambling. Gambling is risky.

The world of commercial Real Estate is a very big deal. I know home owners have been taking the blame for the credit crisis, but home mortgages are nothing in the ponzi scheme. As comment #2 says:

If you have that much money, you have the resources to predict this crisis.

The crisis is credit and consumer spending. The bankruptcy laws were changed in 2005 in anticipation of today’s market crash. The financing of the American Dream, and exporting the Dream around the world has come to a halt. All the little financial engineering scams are running out and the money is heading for cover.

Yes, your hedge fund, pension, 401K, IRA is in commercial Real Estate and paper. Did you really think when global economic advisors were talking about mortgage backed securities they were talking about your home? You’re going to pay, that’s a no brainer. A few million homes sitting vacant means less to consumer confidence than the foreclosure of a Rockefeller Center

When big land leases for Walgreens start coming up empty then people may start getting really nervous. How about the Real Estate holdings of Sears, or General Motors? When large corporations start losing financing revenue they lose the ability to float subsidiary leases on manufacturing.

When you idle employees you also lose land lease income. No rental income, no financing income, no employee income, you’re completely out of business.

Office space is another tip of a much larger iceberg. In New York it’s already a big problem. As you lose job centers you lose renters, buyers, and speculators.

OK, on Christmas Eve it’s a time of hope. My wish is that with a new direction the economies of the world can get back to basics. We do have six billion people in the world who need to be housed, fed, and clothed. We need a workable health care system that is level and available to every one in the world equally. Getting rich from human suffering is my pet peave. Our medical profession is a disgrace.

The same misguided American way of doing business that brought us the pill for profit medical industry has infected everything. Getting money for nothing has become the American way of life. Rather than build high quality housing we cut corners. Cars are a joke. The great Sears empire bult from the ground up has been reduced to selling Chinese products at twice the fair price through financing scams of no interest, no payments until 2009.

We in America need to get to work and pay off all of our debt. We need to create wealth by doing something. We need better mouse traps, cars, and solar panels, with fair lending practices. We need to produce, and manufacture our way into a prosperity. That’s what works. That’s what I see in the next few years.

If you want to invest, invest in something you personally control. Start a business, build a car, or lend money to some one with a vision, who you know, who you can help if things start going sideways. Buy a house and pay it off. Do a deal with some one who believes like you do. Build a house if you have the ability and build it to last a hundered years.

The days of trusting others with your money are way past. The world has gotten very large and there is a lot to keep track of. I think we’re seeing that even the very rich get burned with Enrons, Exxons, and Hillshire Farms. We have a lot of rebuilding to do and there is plenty of opportunity right here as we’re discussing today.

The public watched Countrywide, Bear Stearns, Indymac, Fannie Mae, Freddie Mac, Lehman Brothers, Merril Lynch, AIG, and others be taken over by larger institutions, the government, or file for bankruptcy. These were direct results of decisions made by senior management to invest in risky investments. Common shareholders, bondholders, and some depositors some of their investments/deposits, most of their invsestments, and in some cases all of their investments. At the time that JP Morgan took over WaMu the FDIC limit was $100K. If anyone had deposits in excess of that amount in an account there was a significant chance that they could have lost that money. Anyone with a brain would have been a fool to leave that money in WaMu.

WaMu didn’t fail because despositors were hysterical. WaMu failed because they waded very deep into the subprime pool. These were decisions made by senior management. In the end they trust us, we are well capitalized. These were the same people that guided the good ship WaMu onto the rocks. Depositors had good reason to lose confidence in WaMu and they acted raitional manner.

When a bank distributes money to the borrower, they book the full value of the loan over the lifetime of the loan (principal+interest to be earned)-(risk of prepayment+risk of default+inflation risk)=value of loan. If the risk side changes, then the value of the loan will be less and the books adjusted accordingly (i.e. a loss). If a bank sells a loan at below the booked value, then they will have a loss, hence selling a loan to the government is a nullity. Now a loss or gain is not realized until a triggering event happens, i.e. selling the loan, default, etc. Forcing banks to sell this loans for a loss is not appealing.

FDIC insurance doesn’t help if you are a business that has over $100k to pay your current liabilities. As much as I’m sorry to see the last large bank in Seattle go extinct, I’d say it was rational and prudent to pull $ from Wamu.

I don’t think $1B/day in withdrawals is a “small scale” run…

No, actually, as we have seen, when the Feds have given the banksters money they just hoard it.
If WaMu had actually been solvent they could ahve survived a small scale “run” like they experienced.

I think this clearly points out that all the deregulation of the financial system has been a disaster. Savings and Loans should never have been permitted to move out side of their original business model.

More to the point of the post: IMHO, the collapse of over priced commercial real estate is a good thing for small businesses. Deflation of commercial rents is a strong positive. Just like deflation of overinflated residential rents is a strong positive.

I don’t think they are that different. When the Fed buys a loan, the bank sells a loan asset and in exchange the bank gets cash which it can use for its reserve. A capital injection gives it reserve cash also, in exchange for dilution of its shareholders.

“so they didn’t have the resources after all, right?”

Any bank is susceptible to a bank run. That’s why they have the FDIC. However, if the option-ARM problem is as bad as they say, and seems to be concentrated in WaMu’s main area of California, then even if they had made it through this year they would still be doomed.

so they didn’t have the resources after all, right?

My day job offers a pension. Since it is not fully funded, I decided that owning rental property would secure my future. Oops.

WAMU had the resources to survive the down turn, but people acted hysterically and withdrew their deposits. This did two things to WAMU (1) they had to generate the cash to pay the people that withdrew and (2) they didn’t have the reserves to remain liquid, i.e. $1 in deposits equals $10 in overnight credit. So $1,000,000 in withdrawn deposits will mean WAMU loses the ability to borrow $10,000,000.

This is why economists advocated capital injections into banks instead of buying bad mortgages. $1 in capital allows the bank to borrow $10 to cover the bad loans. The buying of loans is a nullity. $1 of mortgages bought equals 0. There is no gain in their position, but there is no loss (although mark-to-market accounting may mess this equation up. i.e. the bank booked the entire amount of the gain to be realized from the loan, minus risk and inflation, at the time of disbursement. If risk or inflation changes, the value booked needs to be adjusted and the bank may lose money by having the government buy the loans. Sorta like what happened to Enron. Enron booked all the gains in one year, but when the contracts went sour in the early 2000s, they had to restate their books, which caused huge losses.)